They were looking forward to a busy weekend at the Arizona Inn, a historic boutique hotel set in 14 acres of lush gardens in central Tucson. Genteel holidaymakers typically pay upwards of $300-a-night to lounge by the sun-drenched pool, drink tea on the patio, or dine under the desert stars, enjoying the delicate tinkle of a grand piano. But then the angry emails started to arrive.

They were looking forward to a busy weekend at the Arizona Inn, a historic boutique hotel set in 14 acres of lush gardens in central Tucson. Genteel holidaymakers typically pay upwards of $300-a-night to lounge by the sun-drenched pool, drink tea on the patio, or dine under the desert stars, enjoying the delicate tinkle of a grand piano. But then the angry emails started to arrive.

"We cannot come to Arizona any more," declared Joy Mann, who had been planning a road trip from her native Idaho. "I am of Mediterranean heritage, and very concerned. I don't carry papers that indicate I am an American citizen, as I was born here... this is a very scary situation. The police can now come up to you for no reason and ask for papers. My son is a construction worker and very suntanned, I would fear for him."

In all, 20 guests have so far cancelled stays at the upmarket hotel, citing either fears of, or anger about, a draconian new law which aims to combat illegal immigration from Mexico. They are part of a growing consumer boycott that aims to turn the Copper State into a modern-day equivalent of Apartheid-era South Africa. And if they were hoping to worry the locals, they have certainly succeeded.

"It's just upsetting to read these e-mails," says Will Conroy, the hotel's president, who says he started receiving cancellations last Friday, a matter of minutes after Arizona's right-wing governor, Jan Brewer, signed a contentious new immigration bill into law. "People love the Inn, but they are putting their feelings about Arizona first. And they won't be coming back, they say."

The new measure, Senate Bill 1070, instructs police across the state to stop and question anyone they "reasonably suspect" of being an undocumented immigrant. If that person cannot provide documents proving they are entitled to be in the US, they will be arrested and fined. If their immigration status cannot subsequently be confirmed, they will be swiftly deported.

Supporters of the bill – a comfortable majority of Arizonans – believe it is the only way to deal with an estimated 460,000 foreigners estimated to be living illegally in their state. Opponents say it smacks of racism, will legitimise police harassment of the Hispanic community, and destroy a grassroots economy that relies on undocumented workers to clean Arizona's swimming pools, mow its lawns, pick crops, and support its fast-food restaurants and neighbourhood supermarkets.

The spiralling row has sparked nationwide soul-searching, and brought thousands of protesters to the State Capitol in Phoenix. Yesterday, they were banging drums, saying prayers, in Spanish around a makeshift Catholic shrine, and brandishing placards with slogans like: "Stop the hate," and "Work is not a crime."

"Under this law, I will live in fear," said demonstrator Enrique Diaz Martinez, who has lived in the United States for 25 years. "I have an American wife, and children who were born here so are US citizens. I work hard and pay my taxes. But now, if I'm driving to work and the cops stop me and ask for my papers, and I don't have them, I will be committing a crime. This will destroy families."

High-profile critics of 1070 include Barack Obama. He says the draconian law underlines the importance of fulfilling his election pledge to reform the immigration system, which has left America with an estimated 10 million illegal residents. The US President has called the Arizona law "misguided", said it will lead to racial profiling, and has ordered lawyers at the Justice Department to review whether it is constitutional.

His Mexican counterpart, Felipe Calderon, said this week that 1070 will "open the door to intolerance, hate, discrimination and abuse". The Latino singer Shakira is due to declare her opposition at a speech in Phoenix today, while the Reverend Al Sharpton is rumoured to be coming to town this weekend, and has already likened the battle against the bill to the Civil Rights struggle.

"Most undocumented people here are of course from Mexico, or look like they're from Mexico, so the police are going to focus their efforts on Hispanic people," says Daniel Pochoda, a lawyer for the American Civil Liberties Union, which is challenging the law. "You're going to see a lot of people, who are legally here, being detained for walking down the street, just because of the colour of their skin. What could be more totalitarian than that?"

Hard-scrabble Arizonans are happy to endure a bit of condemnation, particularly from the political Left; but they are less willing to be hurt in the pocket. And that is exactly how opponents of the illegal immigration law are now hoping to overturn it. On Monday, San Francisco's Mayor, Gavin Newsom, suspended all travel to the State by city employees. LA's city council is considering a formal boycott of Arizona businesses. Mexico has advised its affluent citizens not to holiday there.

These are ominous moves, because hotels and conference centres are Arizona's biggest single economic engine, providing jobs for 200,000 people. The Hotel and Lodging Association said yesterday that most of the state's upmarket golfing venues and spa resorts are now reporting a small, but growing trickle of cancellations. In Phoenix alone, at least six planned business conferences have been axed.

"Our members are getting a lot of feedback about this," said a HLA spokesman. "It couldn't have come at a worse time, to be honest. We really suffered during the recession, and were starting to see some green shoots of recovery. Now this. The irony is that a boycott particularly hurts the Hispanic community. General managers of hotels aren't going to lose their jobs, their hourly workers are. They're the ones whose shifts are going to be cut. Our industry is one of the biggest employers of minorities and by boycotting us, you hurt them."

Many hoteliers can still recall an eerily-similar tourist boycott which hit Arizona in the late 80s and early 90s when the state's then-governor refused to pass a law creating a public holiday on Martin Luther King Day. The protest cost the local hospitality industry hundreds of millions of dollars and prompted the NFL to move a planned Superbowl to California. Eventually, in 1992, the state backed down and now MLK's birth is celebrated in Arizona every 18 January.

An occasionally-ugly history of race relations is largely an accident of Arizona's geography. Its largely-unfenced southern border is one of the best-trodden routes for immigrants from Mexico to cross to the more prosperous US. As a result, around 30 per cent of the state's population of 6.5 million are Hispanic. The Department of Homeland Security says roughly 460,000 of those are thought to be illegal immigrants – although the recession has seen their number decline by 100,000 since 2008.

Most studies conclude that undocumented aliens contribute as much, in tax, as they cost to support. But populist right-wingers still blame them for increasing the battle for places in public schools, and clogging up free beds in emergency wards. They also moan about new arrivals failing to integrate by learning English; many of the advertising billboards in Phoenix are written in Spanish.

The big issue, however, is crime. Mexico's spiralling drug war has seen a huge rise in kidnappings and murders linked to the Hispanic community and spawned endless ugly headlines about Latino gangs. Tensions spilled over last month, when a white rancher whose property sits near the Mexican border was murdered, apparently by illegal immigrants.

"The public wants something done. They're tired of it," said state Senator Russell Pearce, who sponsored 1070, which also makes it an offence to carry an illegal immigrant in your car, or to hire one as a day-labourer. "They've seen the ineptness and the malfeasance on the part of the government, and they're frustrated."

It is no coincidence that Senator Pearce's bill was timed to take effect in roughly 90 days, just before the state holds what are expected to be closely-fought elections. The bill has high-profile supporters in local resident, Senator John McCain, as well as Joe Arpaio, the self-styled "toughest sheriff in America" who just happens to be considering a run for governor.

Mr Arpaio presides over Maricopa County, which includes much of Phoenix, and has been a constant presence on the airwaves in recent days, arguing that enforcing draconian immigration laws needn't be a drain on resources.

Yesterday, he boasted that a "posse" of his officers had just arrested 22 people at a fast-food restaurant. "I just opened 22 jobs for people here legally," he declared, gleefully. Most locals have been smiling with him. But if the consumer boycott starts to bite, and 1070 starts costing Arizona jobs, hunting down illegal "aliens" may not end up being such a vote-winner.